IMPORTANT POINT
When the amounts set apart towards bad and doubtful debts were not set apart to meet any known liability, that existed at the date of the balance sheet, these were held as reserves qualifying for appropriate relief under Rule 1(ix)(b) of the First Schedule and Rule 1(iii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964.

Headnote:Taxation-Companies (Profits) Surtax Act, 1964-Sections 2(5), (8), (9) and 4-Rule 1(xi)(b) of First Schedule and Rule 1(iii) of Second Schedule-Reserve-Assessment years 1971-72, 1972-73, 1973-74-Claim for relief under Rule 1(xi)(b) and Rule 1(iii)-Banking Company- Assessee ser apart substantial amounts as reserve for bad and doubtful debts in all years-No amount of bad debt was actually written off or adjusted against amount claimed as reserves-Amounts set apart not designed to meet any known liability-Whether amounts set apart by assessee during each assessment year for bad and doubtful debts in the balance sheets of relevant period constitute reserve as contemplated by Rule 1(ix)(b) of First Schedule and Rule 1(iii) of Second Schedule to the Act ?-(Yes)-High Court was in error in surmising that assessee being a banking company was bound to have bad and doubtful debts-It all depends upon facts and circumstances.
       Held that if the transfer of amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as reserve . In this case, substantial amounts were set apart as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as "reserves" and not as "provisions" designed to meet liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of balance sheets. These facts have been found by the Tribunal. On the facts, the amount seta apart as reserves cannot be said to be so earmarked, when any liability has actually arisen or was anticipated by the assessee. It cannot be said either, that the amounts set apart out of the profits were designed to meet any known liability, that existed at the date of the balance-sheet. Tested in the light of the decisions of this Court, referred to hereinabove, it appears to us, that the amounts set apart towards bad and doubtful debts in these cases are "reserves" qualifying for appropriate relief under rule 1(xi)(b) of the First Schedule and rule 1(iii) of the Second Schedule of the Act. (Para 12)
       Further held : The High Court has taken the view that the "fund created or a sum of money set apart to meet any liability which the assessee "can reasonably and legitimately anticipate" on the date of preparation of the balance sheet, is the same, as in a case "where the liability has actually arisen", (a present known liability) an the fund to meet such liability cannot be treated as reserve". In the view of the High Court, since the assessee is a banking company, it would be "reasonable and legitimate to assume" that in the course of its business, "it is bound to have" bad and doubtful debts for which "it may", in anticipation, make a provision in the balance sheet by having a separate fund or an account to meet such anticipated liability. We are afraid that the aforesaid assumption is totally unjustified and proceeds on mere surmises and conjectures. This is not a case, when at the time fund is earmarked, there is a known liability - one which has either arisen or anticipated legitimately, by the assessee - and the fund to meet such eventuality cannot be treated as "reserves". The observations of this Court that the liability should be one "which has actually arisen or is anticipated legitimately by the assessee", cannot be extended to hold, that in the case of an assessee carrying on banking business, it is "bound" or "can reasonably anticipate" on the date of the preparation of balance sheet "bad and doubtful debts", for which "it ought", in anticipation, make a provision and such provision for antitcipated liability should be equated with known and existed liability and should be construed as a provision. The question in such cases, is whether the liability was "known" or "anticiapted" on the date when the balance sheet was prepared. The question is not whether the assessee "can anticipate" or "reasonably anticipate" on the date when the balance sheet was prepared about "the bad and doubtful debts". The High Court was in error in surmising that the assessee being a banking company is bound to have bad and doubtful debts. It need not necessarily be so. It is not bound to anticipate on the date of preparation of balance sheet that all or any of its debts "are bound to be bad and doubtful". It all depends upon facts and circumstances. We are of the view that the High Court misunderstood the scope of the observations in Saran Engineering Co. s case 161 ITR 741 and surmised that the observations quoted at page 748 will even cover cases, where the liability was not factually anticpated on the date of the preparation of the balance sheet, but also will apply to cases, where the company "ought and can" anticipate on the date of preparation of the balance sheet. (Para 13)

JUDGMENT

Paripoornan, JJ.-Leave granted in all the special leave petitions.

2. These are all connected cases. The matter arises under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the Act). The parties, in all the appeals are the same. The appellant in the appeals is "The State Bank of Patiala" and the respondent is the "Commissioner of Income Tax, Patiala". The Civil Appeals filed from Special Leave Petitions (C) Nos. 2392-95 of 1993 are the main cases. They relate to four assessment years - 1971-72, 1972-73, 1973-74 and 1975-76. The appellant-assessee set apart amounts as "reserve" for bad and doubtful debts" in all the years. A claim was laid that such sums qualified as reserves for the purpose of Rule 1(xi)(b) of the First Schedule and Rule 1 (iii) of the Second Schedule of the Act and such sums, representing reserves, should be included in the capital of the appellant for appropriate relief. The Income Tax Officer rejected the claim. In appeal, the Income Tax Appellate Tribunal allowed the plea of the assessee. The Income Tax Appellate Tribunal, by its detailed order dated 23.1.1980. upheld the plea of the assessee and held that the amounts set apart as reserves are entitled for appropriate relief under Rule 1(xi)(b) of the First Schedule and Rule 1(iii) of the Second Schedule of the Act. On motion by the Revenue the Appellate Tribunal referred the following questions of law for the decision of the High Court of Punjab and Haryana, which were as Income Tax Reference Nos. 235 to 238 of 1980 :-

"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amounts provided by the assessee for bad and doubtful debts in the balance sheets of the relevant previous years qualified as reserves for the purpose of clause xi(b) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 and consequently allowing yearwise deduction as under :-

1971-72 Rs. 7,00,000/-

1972-73 Rs. 13,78,000/-

1973-74 Rs. 22,11,000/-

1975-76 Rs. 15,98,000/-

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amounts of Rs. 10,53,576/-, Rs. 27,21,641/-, Rs. 29,91,641/- and Rs. 47,16,641 provided for bad and doubtful debts as at the beginning of the relevant accounting year respectively for the assessment years 1971-72, 1972-73, 1973-74 and 1975-76 qualified as a reserve for inclusion in the capital of the assessee under Second Schedule to the Companies (Profits) Surtax Act, 1964."

(emphasis supplied)

By a detailed judgment dated 27.7.1992 the High Court took the view that on the facts and circumstances of the present case, sums of money set apart by the assessee as reserves are really "provisions" and not "reserves" and so, such sums are not entitled to the relief granted by the Appellate Tribunal. It is, thereafter the assessee moved this Court by special leave petition Nos. 2392-95 of 1993 and obtained special leave in the four cases. The judgment of the High Court is reported as Commissioner of Income-tax v. State Bank of Patiala.1

3. Special leave petitions (C) Nos. 27543-50 of 1995 relate to the same assessee and eight assessment years are involved therein - 1979-80 to 1987-88 except 1985-86. For those years, identical claim put forward by the appellant-assessee was rejected by the Income Tax Officer. In appeal, CIT allowed the claims. In the meanwhile, the decision of the High Court for the previous four years, i.e., 1971-72, 1972-73, 1973-74 and 1975-76 had been rendered and so the Tribunal, following the decision of the High Court, held against the assessee. The plea of the assessee to refer the matter either to the appropriate High Court or to this Court was disallowed. The assessee has filed special leave petitions in

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